From Imitation to Innovation-

Lessons of Industry Upgrading in China

Prof. ZHU, Hengyuan

outline
• Industrial upgrading: a global perspective
• case study of Chinese mobile handset industry
• Conclusion
Industrial upgrading from a global perspective
 China and Indonesia
9000

8000
GDP per Capital ($)
7000
GDP per Capital($)

6000

5000

4000

3000
China Indonesia
2000

1000

0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Manufacturing, value added (% of GDP)

45
40
35
% of GDP

30
25
20
15 China Indonesia
10
5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: World Bank
 China Industry Upgrading

China’s Processing trade VS General Trade China's Technology-Intensive Exports VS Labor-Intensive Exports

Percentage
Percentage

Labor-Intensive Industry Technology-Intensive Industry

General Trade Processing Trade

Source: Wind
 China Industry Upgrading
China's ODI&FDI
$1,400.00

$1,200.00

$1,000.00
US DOLLAR

$800.00

$600.00

$400.00

$200.00

$-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ODI FDI

FDI & ODI:

Industry Structure and Demand Structure
From Labor-Intensive Industry to Technology-Intensive Industry
Source: World Bank
 Technological take-off
60000 3.5

R&D Intensity Percentage%

50000
GDP per Capital($)

2.5
40000

2
30000
1.5

20000
1

10000
0.5

0 0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China Germany USA Indonesia China Germany USA Indonesia

Source: World Bank
Case study of Chinese mobile handset industry
 Chinese Mobile handset industry in global market

2500.0
Production
2000.0
Quantity(M)

1500.0

1000.0

500.0
Sales
2500
0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2000
Global Production(M) China Production(M)

Quantity(M)
1500

1000

500

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Global Sales(M) China Sales(M)

Source: World Bank

 Starting from …
Brand &
Components Design Manufacture Retail
Market

Before Chip
Vertically integrated branded manufactures (all foreign brand) Mobile operators
manufacturers
1997
 First wave of innovation
Brand &
Components Design Manufacture Retail
Market

Chip
Vertically integrated branded OEMs Mobile operators
Before manufacturers
1997

Chip
Vertically integrated branded OEMs Retailers Customers
manufacturers
1997 - 1999

Cell Star, A Mobile phone distributor headquarter in Coppell, TX enter into

mainland China in 1997 and achieved a remarkable success, under the
leadership of A.S. Horng, to whom the great China operation was sold to
in 2005 after several year of struggle.

Telling Communications was found in 1996, By Shaowen Huang etc.,

in Shenzhen and initially was the national agency of Motorola and then
Samsung.
 The second wave
Brand &
Components Design Manufacture Retail
Market

Chip
Vertically integrated branded OEMs Mobile operators
manufacturers
Before
1997
Chip
Vertically integrated branded OEMs Retailers Customers
manufacturers

Vertically integrated branded OEMs Retailers

Chip
Customers
1997 - 1999 manufacturers
Module providers domestic manufacturers

Wavecom was found in 1993 with headquarter in France and

successfully entered into Chinese market with the cooperate
2000 - 2003
partner TCL in 2000. Wavecom is the first company that
commercializes GSM technically.
TCL, A cordless telephone manufacturer in Guangdong; Bird, a
Page Manufacture enter into mobile phone market in 1999
 Modular Production（2001-2003）：
Imported standard modules Indigenous manufacturing power

Replacing vertically integrated handset manufacturers in

the value chain
Supplying cheaper handsets

Innovators
Partners

Bird,TCL,
Kejian Wavecom
 Then the third…
Brand &
Components Design Manufacture Retail
Market

Chip
Vertically integrated branded OEMs Mobile operators
Before manufacturers
1997

CECW, found in 1999, was a joint venture of

Chip
manufacturers
CEC (中国电子信息产业集团公司)
Vertically integrated branded OEMs and Cellon
Retailers Customers
1997 - 1999 International. CECW boomed in late 2003 with
22 new design products.

Vertically integrated branded OEMs Retailers

Chip TechFaith ,found in 2002 with the headquarter
manufacturers in China, was the biggest
Module providers Mobile
domestic phone
manufacturers
Customers
2000 - 2003 design house in China.
Chip manufacturers
OEMs Fulfilment Distributor
(provide integrated solution )

Chip manufacturers
(provide integrated Design companies
2004 -2008
solution )
OEMs Licensed domestic manufacturers Customers
Chip manufacturers + Design companies
 Independent Design House（2004-2005）:
Independent design house Manufacturing power
Innovators Partners
Bridging global chipset providers and stronger indigenous Bird,TCL, CECW
manufacturing power Amoi, TechFaith
Fast and cost-effective product design and production to cater Kejian
rapidly evolving consumer preferences
 Here comes the turn-key solution
Brand &
Components Design Manufacture Retail
Market

Chip
Vertically integrated branded OEMs Mobile operators
Before manufacturers
1997 MTK (联发科) is a famous Taiwan Chip manufacture, found
in 1997. MTK first entered into Mainland market in 2004
cooperating with Tianyu and then expanded its business.
Chip
Vertically integrated branded OEMs Retailers Customers
1997 - 1999
manufacturers
Tianyu, found in 2002, once was the largest ‘Shanzhai’
mobile phone manufacture, relying on the integrated
solution provided by MTK, now has huge sales portion.
Vertically integrated branded OEMs Retailers
Chip
manufacturers
Module providers domestic manufacturers
2000 - 2003 Customers

Chip manufacturers
OEMs Fulfilment Distributor
(provide integrated solution )

Chip manufacturers
(provide integrated Design companies
2004 - 2006
solution )
OEMs Licensed domestic manufacturers Customers
Chip manufacturers + Design companies
 Turnkey Solutions（2006-2008）:
Outsourcing manufacturing power Innovative channel strategies
Innovators Partners
Mass customized products to take over the low-end markets Tianyu MTK
Lenovo
Forcing multinational firms to adjust their product and
channel strategies
 Capability accumulation in function phone era
Brand&
Components Design Manufacture Retail
market

Chip
Before 1997 manufact Vertically integrated branded OEMs Mobile operators
urers

Chip
1997-1999 Vertically integrated branded OEMs Retailers Customers
manufactur
ers

2000-2003
Vertically integrated branded OEMs Retailers
Chip Custom
manufacturers ers
Module providers domestic manufacturers

Foreign
2004-2008 manufacturers
OEMs foreign brands Retailers
Chip manufacturers
Custom
(provide integrated Chained direct sellers ers
solution )
Design companies OEMs Licensed domestic manufacturers
Smartphone era: go global
From exploration to exploitation
 Two giants enter…
Xiaomi: Low-cost products
• Starting from 2009
• Custom-focused Innovation
• Designed Mi4i smartphone –a lower cost version of the
Chinese Mi4 smartphone in Indian Market.
• Planning to build an R&D center, a manufacturing facility,
a data center and a technical support center in India.

Huawei: The world largest telecom equipment maker

• Starting from corporation with operators
• Strong technological capability
• Strategically focus on smartphone handset in
2011
• Agile Innovation
• Inspired Experience
• Globalization
 And those hidden-champions…
Tecno's sign
everywhere. Its
posters are on every
shop, billboard and
window
OnePlus: A two-year-old Shenzhen-based smartphone
startup
Tenco Mobile ---Shenzhen Transsion Holdings Ltd • Launched its first model in April 2014 and sold 1.5
• Trassion’s founder is Zhu Zhaojiang who worked at million unites.
Ningbo Bird Co before. • Retail around $300
• Transsion exported phone in Africa • More than 90% of sales were coming from outside
• 6.5 million in 2010 China
• 45 million in 2014
• Second place among Chinses mobile phone
exporters, behind Huawei in global shipments

Tenco is budget-priced phones

• Dual-SIM card slots and lively ring tones
• ODM, Supply Chain in China
 The changed landscape
2014 2015 2016
Rankings
Market
Company Company Market Share Company Market Share( E)
Share
1 Samsung 27.80% Samsung 24.80% Samsung 22.20%
2 Apple 16.40% Apple 17.50% Apple 16.80%
3 Lenovo+Motorola 7.90% Huawei 8.40% Huawei 9.30%
4 Huawei 6.20% Xiaomi 5.60% Lenovo 6.10%
5 LG 5.40% Lenovo 5.40% Xiaomi 5.80%
6 Xiaomi 5.20% LG 5.30% LG 5.00%
7 Coolpad 4.20% TCL 4.00% TCL 4.00%
8 Sony 3.90% OPPO 3.80% OPPO 3.90%
9 TCL 3.30% BBK/VIVO 3.30% BBK/VIVO 3.40%
10 ZTE 3.10% ZTE 3.10% ZTE 3.10%
Others 16.60% Others 18.80% Others 20.30%

Source:TrendFroce
 Looking ahead…
China faces an innovation imperative
The labor force is no longer growing Return on fixed asset investment is declining
Aging is expected to It takes 60% more capital
reduce the working-age to generate a unit of GDP
population by 16% by than it did from 1990 to
2050 2010

From an Innovation sponge-absorbing and adapting global technologies

and knowledge-to an innovation leader.
• China’s large and dynamic market
• China has the world’s most intensive manufacturing ecosystem
• ambitious entrepreneurs and flourishing innovations
• Government push to raise R&D spending, train scientists and file for
patents
 Conclusion
Innovation in China is driven by
huge, diversified and dynamic local
demand
China College Graduates (’000)
Leverage technological and product 800

resources which available globally 700

600

People(000)
500

Accumulated Capability in Local 400

market exploring in Global 300

200

100

Political and Society Stability 0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Keep Investing in talent development

Source: World Bank